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Even as the equity markets were making fresh highs in recent months, we had the sobering effect of the US Federal Reserve increasing interest rates and the credit rating of the US being downgraded by Fitch. Indices have turned volatile over the past few weeks. Domestically, while food inflation is relatively high, core sectors are expanding, services are going strong and growth outlook remains healthy.
For retail investors, these conflicting local and global developments would mean hesitation and uncertainty in entering markets, especially for the recent entrants. Balanced advantage or dynamic asset allocation funds could be a good way for investors to participate in the market given that they allocate between equity (including derivatives) and debt depending on factors such as index levels, valuations and so on.
In this regard, Tata Balanced Advantage fund, which has been around for a little under five years, may be a good investment for investors with a moderate risk appetite and even for those just starting off.
For medium-term goals or targets stretching up to around five years, the fund may be a good addition for investors’ portfolio.
Above-average performance
Tata Balanced Advantage Fund was rolled out in January 2019 and has delivered consistent returns over the past four-and-a-half years. Over one-, three- and four-year time-frames, the fund has done better than the CRISIL Hybrid 50+50 Moderate Index and many peer schemes. Over a trailing four-year period, Tata Balanced Advantage delivered around 14.7 per cent returns, which is better than the likes of Axis Balanced Advantage, Bandhan Balanced Advantage and HSBC Balanced Advantage.
Though its track record is not very long, limiting the data points available, three-year rolling returns over January 2019 to August 2023 still indicate that Tata Balanced has delivered an average of 15.1 per cent returns, placing it among the best in the category. Also, these three-year rolling returns indicate that the fund has delivered more than 10 per cent all the time and over 12 per cent nearly 97 per cent of the time.
Thus the fund has been a steady above-average performer from the time it has been around.
Value-driven allocation
The fund follows a valuation-driven model to determine the equity allocation (unhedged) in the portfolio. Depending on the PE (price earnings) multiple (average of trailing and forward PE) of the market and other macro indicators, the proportion of equity allocation is decided. For example, when valuations were depressed in early 2020 after the COVID-related market fall, Tata Balanced increased the stocks portion to 64 per cent of the portfolio. As the indices rallied spectacularly later on, the fund progressively reduced equity exposure. It has generally maintained equities at 40-50 per cent of the portfolio. This approach ensures optimal returns and allows for profit taking as well at periodic intervals. Of course, there may be times when the returns may not be maximised, but balanced advantage funds are more about reducing risks for reasonable returns.
Most of the picks are large-caps from the Sensex and Nifty baskets and thus aren’t too risky.
The fund also hedges its portfolio via derivatives (futures). The hedged portion varies according to market conditions. It can account for over 20 per cent of the portfolio at times. The idea is to reduce downsides via hedges and also ensure that the equity and derivatives portion together make up at least 65 per cent of the portfolio to ensure equity taxation.
The debt portion of the fund comprises normally-safe bets such as government securities, non-convertible debentures, bonds and zero-coupon bonds of highly rated corporates – most of them rated AAA and a small portion in AA+. HDFC, Power Finance Corporation, NABARD and Tata Realty are among a few whose bonds figure in the fund’s portfolio. Debt accounts for 25-30 per cent of the portfolio.
Tata Balanced has invested its debt portion in the relatively shorter end of the curve, which had attractive yields after the RBI hiked interest rates by 259 basis points in the last one year. The average maturity is 1.88 years. The modified duration is 1.58 years indicating somewhat lower sensitivity of its bond prices to interest rate movements.
For starters and those looking to save for goals that aren’t too far away, Tata Balanced can be a good addition via the SIP route or through small lump-sums.
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